Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:19]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:38]

Thank you, Mary, and welcome back to Risk Parity Radio for episode number four. This is our weekly portfolio review session. It's also the end of July, so we'll be talking about drawing down on the six sample portfolios. These are the six portfolios that are featured on the website at www.riskparadioradio.com. You just click on the portfolios tab and you'll see them right there. So looking through these portfolios, the first one up is the All Seasons portfolio. It was up 1.49% last month. led by the investment in gold. We will be removing 4% annualized from this portfolio, which means we divide the total by 300 and take that out for August. We'll take it out of the GLDM fund because that is the one that's done the best. It was up 7. 33% in the couple of weeks this portfolio has been in existence. So dividing that by 300, we get $35, which we will be removing from that portfolio, drawing down on it. Moving to the Golden Butterfly portfolio, which is the featured portfolio this week, and we will be discussing in more detail after the overall review. We see that this portfolio is up 3.91% since inception also led by the gold allocation in it in GLDM. And we are drawing down on this at a 5% annualized rate. So we'll divide the total by 240. The total is $10,389 and that results in us taking out $43 this month as the drawdown. And we'll remove that from the GLDM fund since it's up 9.6% since inception. The next portfolio is the Golden Ratio Portfolio, and that portfolio is up 4.23% since inception, also led by the GLDM Gold ETF in there, which is up 9.41% in the last three weeks. So there's $10,398 in there. We are drawing down on this portfolio at an annualized rate of 5%, so we'll divide the total by 240 and be removing $43 from the GLDM fund for this month. Moving to the next portfolio, it is the Risk Parity Ultimate portfolio. And this portfolio is up 3.88%. since inception, so it's about the same as the last one. It's got $10,389 in it. We'll be drawing down on this portfolio at a rate of 6% annualized variable rate, which means that we divide the total in the portfolio by 200 and that comes to $52, which we will be removing and we will take it out of the GLDM fund as well, the Gold Fund that is up 9.4% in this portfolio in the last three weeks. The other big winner was the TMF Long-Term Treasury 3x Leveraged Fund, which is up 9.16% in the same time period. Moving to the fifth portfolio, the Accelerated Permanent Portfolio. This is one of our experimental portfolios. and in this portfolio it is up 6.55% in the three weeks it's been operating led by the TMF leveraged 20-year Treasury fund and the gold fund which are up 9.46% and 9.3% respectively so there is $10,655 in here we are taking out at a rate of 8% variable, which means for the month we divide the total by 150 and remove that amount of money. It is $71 and we will be taking it out of the best performer for the month, which was the TMF fund. And the sixth portfolio is the aggressive 5050 portfolio. This portfolio is up 5.07% in the three weeks of operation. It is led by the investment in the TMF Leveraged 20-Year Treasury Bond Fund as well. So there's $10,507 in it. We are removing it at an annualized variable rate of 8%. So we will divide the total by 150, which means we'll be taking out $70 out of this portfolio and we'll remove it from the TMF fund. Since we are using Fidelity's app for this, we're able to actually take out these small amounts of money in terms of dollars because that app allows you to invest in fractional shares. So we can sell fractions of shares simply to take out the exact amount of money that we need to take out. The total taken out is $314 for the month. that is on approximately a $60,000 investment. So if you were to multiply that, if that were a $600,000 investment, that would be $3,000 for this month. And if it were a $1.2 million investment, that would be over $6,200 for the month. Overall, this has been an excellent performance for these portfolios, particularly the ones with the gold in them, which has gone up a lot these days. It doesn't do that all the time, but you never know when it will happen and when it does happen, these portfolios benefit from it greatly. Now turning to our featured portfolio of the week, this is the Golden Butterfly Portfolio, which is the brainchild of a man named Tyler, who is also the founder and keeper of the website portfolio charts. Now we will be devoting an entire episode to portfolio charts, at least one episode, because it is one of the best tools for the do-it-yourself investor to analyze their own portfolios to see whether it's appropriate for them. Tyler created this website about five or six years ago. He collected data going back to 1974 for scores of asset classes, including the total stock market, all of the small, medium, and large cap stocks, the value stocks, growth stocks, a lot of international stocks, also gold, also treasury bonds, also REITs and commodities, And so this allows a user to use all the calculators there to run simulations on their portfolios to see how they would have performed in the past 50 years and how they might perform in the future. It has some very interesting calculators that not only show the returns but also show safe withdrawal rates for various time periods going from 10 to 30 years and then, or 40 years, excuse me, and then going out to what he calls a permanent withdrawal rate. So this gives a very good way for a retiree or somebody planning to live off their portfolio to really get a handle on what they can expect and what they might be able to withdraw from that portfolio given what's in it. So after he constructed this large data set with all these calculators. Tyler then wanted to ask and answer a question. And his question was, what might a portfolio look like that matched the superior historical returns of the total stock market, but the volatility of the lowest standard deviation portfolios? Is that even possible? And working with his calculators and working with the data, he did find that it was possible to get a portfolio that had stock market like returns over time, but had a much lower standard deviation, and in fact is about half as risky as the total stock market. So what he came up with is what he called the Golden Butterfly, and it's composed of five different funds. Two of the segments are made out of stocks, two of the segments are made out of bonds, and then he says that the stabilizing head is gold, so you end up with five funds in this portfolio. What we have in our sample portfolio is the investments in the total stock market, that's the ETF VTI. There's an investment in the small cap value segment of the market that is represented by the ETF VIoV. There is a representation of long-term government bonds, which is TLT in the portfolio, and short-term government bonds, which are SHY, is the ETF in the portfolio. And then the gold fund, we are using GLDM, which is just the miniature version of GLD, and that has a lower expense rate than GLD, so that's the one we're using for that portfolio. And so each of these ETFs comprises 20% of the portfolio. And if you take a look at what the correlations are here, you see it comes out to be very balanced. We ran the correlation matrix over at Portfolio Visualizer to take a look at it. And what you see is you have, of course, the two stock funds are highly correlated that they have a 92 correlation, the bond funds are negatively correlated with the stock funds, so they tend to go the opposite way that the stock market funds are going. And then the gold portion of it is not correlated with anything. It has a correlation of near zero with the stock market funds and about 0.2 with the bond market funds. So this type of portfolio gives you that very balanced outcomes. for it. So what were the results then of this when he put this thing together? It ends up being kind of a modified version of the permanent portfolio that we talked about in episode three, but it does better. And what he found in 2015, and we will link to the articles where this information comes from in our show notes, that the Golden Butterfly had a nearly identical long-term real compounded annual growth rate to a stock market fund, but with 60% less volatility, and its single worst year of only minus 11%, and the longest drawdown of only two years. Now, that is an exceptional performance because a stock market portfolio has a drawdown projected of about 40% max and maybe underwater for as long as 13 years historically, at least in the past 50 years. So what that helps you get to is a much more robust portfolio for drawing down upon it. And this portfolio, instead of having that kind of 4% projected safe withdrawal rate, actually has for a 30-year period, has a safe withdrawal rate of 6.4%. and a safe withdrawal rate of 5.3% if you take a look at it on a permanent basis. So it gives you a lot more confidence holding something like this than either the total stock market or even the 60/40 portfolio, which also ends up having a safe withdrawal rate projected of only around 4%. so we are doing 1% to 2% better with this golden butterfly portfolio. And what he says as the philosophy behind this portfolio, and I'll just read it to you, invest in volatile, uncorrelated assets that cover every economic condition, and you'll do pretty well with limited downside, no matter what happens in the markets. What is interesting about that statement is it is very much the same kind of statement that Ray Dalio makes when he talks about the holy grail of investing of having a number of uncorrelated asset streams or revenue streams. And that is what makes these portfolios really shine. And if you think back to the history of the market since 1970 and look at these various assets in this portfolio, You can see how it was supported in each decade, regardless of how the economic conditions were. So in the 1970s, when the stock market portions of this portfolio were not doing much at all, and the long-term bond part of it was getting killed, the short-term bonds were doing fine, and gold was going out of sight. which led to a profitable situation for the portfolio. Then when economic conditions switched in the 1980s, the stock market portions took off. And so they would have buttressed the portfolio in addition to the long-term bonds. As interest rates fell, that portion of the portfolio would do quite well. Meanwhile, gold was suffering, going down 70% or 80% in that time. And short-term bonds weren't doing a whole lot either. they are probably doing fine. They are the least volatile portion of that portfolio. And the same thing happened in the 1990s. But then you get to the 2000s, which were a terrible decade for stocks. And during that decade, really it was the long-term bonds that shined and the gold that shined again. And so that supported that portfolio, which is why that portfolio only has the maximum drawdown period of three years or less, which is amazing during the entire 50-year period. And so if you hold something like this in retirement, it gives you a really comfortable way to approach it, knowing that no matter what conditions are presented, the portfolio is going to continue to perform because some part of it's going to perform really well even if other portions do not perform well. I should have mentioned that the last 10 years obviously were good for the stock market portions of it and for the long-term bonds as interest rates continued to fall. Gold was a laggard for the past 10 years. It hasn't had a really good year until the last 18 months or so. But now that economic conditions may be changing again, you can see that there's going to be a shift and the portfolio continues to perform. So this is fundamentally what we're looking for in a risk parity style portfolio, something that has uncorrelated assets, something that is going to perform in all kinds of economic conditions and that you can have confidence for the long haul in something like this. That's all we have for you today. We will continue next time with our historical review of risk parity style portfolios in episode five. And this is Frank Vasquez signing off for Risk Parity Radio.

Mostly Mary [17:42]

The Risk Parity Radio show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.